City Union Bank Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Growth below expectations, but a pivot is promised: FY23 growth disappointed after pre-Covid underwriting tightened approvals to ~25%. Management now targets 12–15% loan growth for FY24, skewed to the second half once BCG-led digital lending upgrades take hold.
• Slippage overshot the guided range: FY23 slippage hit 3.02%, 2 bps above the 2.5–3.0% band, after the bank proactively classified ~₹75–80 Cr of accounts showing early sickness signals. Management expects good moderation this year.
• NIM settled at 3.65%, and that is the FY24 anchor: Q4 NIM fell to 3.65% as deposit costs jumped 45 bps while loan yields lagged. The FY24 guide is 3.65% ±10 bps, with half of deposits still to reprice.
• Recovery engine is the profit bridge: Total recoveries and upgrades rose to ₹1,107 Cr in FY23 from ₹795 Cr in FY22. With H1 facing tough treasury and NCLT comps, improved recovery is the lever to deliver PAT growth and a 1.50% ROA for the full year.
• What to watch next quarter: Whether the approval rate actually begins to rise from 25%, the pace of deposit repricing on the remaining 50% of the book, and any sign that H1 PAT headwinds are tracking in line with the full-year confidence.

Growth & the Approval-Rate Pivot

• The 25% bottleneck: Pre-Covid, the bank deliberately tightened underwriting and brought the new-customer approval rate down to ~25%, which constrained growth below expectations in FY23.
• BCG hired to unlock digital lending: The bank is finalizing a BCG engagement to reengineer the entire lending process, from customer experience and renewal through loan origination, sanction, and disbursal. The goal is to raise the approval proportion progressively over the next few quarters.
• Growth back-ended by design: Management is targeting 12–15% loan growth for FY24, but the current run-rate will persist through H1; the acceleration is expected in H2 after BCG’s process fine-tuning takes effect.
• Composition steady for now: No major shift in the advance mix is planned this year. A potential retail push (home, vehicle, co-lending) is a 2024–2025 conversation, not a FY24 driver.
• CD ratio compressed deliberately: The CD ratio fell from 86% to 84% as the bank chose not to squeeze surplus liquidity to the last point; it will stay at this level for a few more months.

Kamakodi: "The approval proportion should progressively increase in the next few quarters. We are aiming for 12% to 15% growth for the current year which should be skewed towards year end."

Asset Quality: Slippage, Recovery & the Proactive Call

• Slippage overshoot was a choice: FY23 slippage of 3.02% exceeded the 2.5–3.0% guided range because, beyond system-automated NPA marking, management applied extra subjectivity to identify and classify ~₹75–80 Cr of standard accounts showing continuous sickness signals.
• Recovery jumped meaningfully: Total recovery and upgradation rose to ₹1,107 Cr in FY23 from ₹795 Cr in FY22, driven by both live accounts and technically written-off pools. Management expects further substantial improvement in FY24.
• NNPA target is pre-Covid levels: The bank aims to bring net NPA back to its pre-Covid level within the coming 4–5 quarters, with coverage ratio (including technical write-offs) moving above 70% and above 50% without them.
• MSME health looks benign: SMA2 numbers are at a historical low, and combined SMA1 plus SMA2 is under 4%. Management says COVID-era issues have largely washed off.
• Credit cost left unguided: Management declined to give a specific credit cost number for FY24, saying it depends on where net NPA closes, but expects a similar improvement in the addition-minus-recovery metric as seen between FY22 and FY23.
• Divergence risk acknowledged: When asked about regulatory divergence, management said no one can claim 100% conviction, because perception can change even when the underlying system output is identical.

Kamakodi: "We applied some extra subjectivity and tried to ensure that we are on the right side of the recognition. So this is the best we could do and we have gone even to the next level. Then rest all we have to leave to the almighty."

Margins & the Deposit Repricing Overhang

• Q4 NIM walk: Cost of deposits rose 45 bps (from 4.60% to 5.07%) while yield on advances rose only 15 bps. An additional 5–6 bps drag came from non-recognition of agricultural KCC interest subvention income.
• Only half the deposits have repriced: 40–50% of deposits have already repriced; the remaining 50% will contribute to further margin pressure as they roll over. Term deposits maturing at 6.0–6.5% are being replaced at 1.0–1.75% higher cost.
• Rate transmission lagged peers: The bank was slower to pass on rate hikes, especially the last two before year-end, though current yield levels are now almost equal to or slightly above most peers. Almost the entire loan book (except ~10%) has now seen transmission.
• FY24 NIM guide: 3.65% ±10 bps: Management expects the full-year NIM to stay around the Q4 FY23 level, with the impact of remaining deposit repricing already built into that number.
• Agricultural subvention recognition: The bank will shift to accrual recognition only after all dues up to FY22 are received; currently, only part of FY21 has been collected. One installment arrived post-call, with the rest awaited.

Profitability: H1 Headwinds, Full-Year Confidence

• Tough H1 comps: H1 FY23 PAT of ~₹500 Cr was flattered by treasury profits and lumpy NCLT recoveries, neither of which will repeat in H1 FY24. Management expects H1 PAT growth to be challenging.
• H2 recovery to compensate: The full-year PAT growth target of 12–15% rests on business growth and improved NPA recovery filling the gap in the second half.
• ROA target: 1.50%: Management hopes to close FY24 at the long-term average ROA of 1.50%, with NPA recovery as the major contributor, despite the H1 drag.
• Cost-to-income to rise: After improving to 38.85% in FY23, the cost-to-income ratio is expected to move back to 40–41% in FY24 in the absence of treasury profit.
• Treasury income muted: No significant treasury gains are expected in the first two quarters; the bank had no surplus liquidity during the period when G-sec entry would have been most profitable, and can at best reduce mark-to-market losses.

Kamakodi: "First half there could be something but the year as a whole we are confident of seeing both ROA growth and also the reduction in the net NPA."

Portfolio Choices & Strategic Restraint

• Gold loan as a tactical fill: Gold loans are used to meet agricultural targets and as a substitute when SME growth is unavailable. Management is uncomfortable with gold loans exceeding 25% of the book and will reduce the share when MSME opportunities return.
• Gold loan yields structurally lower: Yields are under 10% versus ~20% for listed NBFCs, a gap management says is permanent due to fundamental portfolio differences, particularly agricultural classification.
• Consumption lending still on hold: The bank’s ethos has been to fund business asset creation, not consumption. Management is open to change but will wait until digitization is complete, the risk model is perfected, and pricing can appropriately reflect risk. No policy change yet.
• What saved the bank during AQRs: Management attributes past resilience not to doing extraordinary things but to avoiding wrong ones, staying out of large consortiums, and exercising restraint when others rushed into unsecured segments.
• ONDC and Account Aggregator in progress: Enrollment for ONDC has begun, and the bank is working on the account aggregator framework; both should be completed in the next couple of quarters.

Kamakodi: "So far our original ethos had not supported us taking the decision for the retail but days are changing. We also need to be open."

Guidance & Commitments

Key Metrics